Shaky Third Quarter Gives Advisors Pause

The last quarter hasn't been great for retail brokerages. Low trading activity and geopolitical uncertainty kept investors on the sidelines, and advisors are feeling the pinch. We're seeing a mean reversion in revenues and profits, says Frank Fernandez, chief economist at the SIA, who added that 2003 represented a bounce back that is now slowing. We're in a sideways period I don't think anybody will

The last quarter hasn't been great for retail brokerages. Low trading activity and geopolitical uncertainty kept investors on the sidelines, and advisors are feeling the pinch.

“We're seeing a mean reversion in revenues and profits,” says Frank Fernandez, chief economist at the SIA, who added that 2003 represented a bounce back that is now slowing. “We're in a sideways period — I don't think anybody will tell you growth is accelerating right now.”

As a result, not all of the major firms are adding brokers, as many had expected. Merrill Lynch and Morgan Stanley had a net gain of advisors for the third quarter, but Smith Barney was essentially flat and Wachovia showed a net loss.

In Morgan's retail brokerage arm, pretax profits fell 88 percent from the second quarter, from $132 million to $22 million and net revenues dropped 7 percent. Total client assets at the firm fell by $3 billion to $576 billion.

In Merrill Lynch's global private client group, net revenues were down 4 percent from the second quarter to $2.3 billion and unchanged from last year. Pretax earnings fell 9 percent for the quarter, and are down 11 percent from a year ago. Total private client assets edged up $7 billion for the quarter to $1.288 trillion.

Like Morgan, despite the downturn, Merrill continued hiring in the third quarter, adding 100 new FAs, bringing the total to 14,100, a 4 percent increase from 13,500 in third-quarter 2003.

At Smith Barney, revenues in private client services increased 2 percent on a year-over-year basis, but dropped 3 percent from last quarter. Profits also were down, falling 7 percent from the last quarter. Wachovia also reported declines. Its retail-brokerage segment reported earnings of $108 million, down 22 percent from the second quarter and 17 percent from a year ago. Revenue was down 7 percent on a quarter-over-quarter and year-over-year basis.

Smith Barney added two advisors in the third quarter for a total of 12,096, and Wachovia lost 55 advisors — the fourth-consecutive decline in advisors for that firm — to 7,964. A.G. Edwards showed a net decline of 27 advisors to 6,872.